Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some semiconductor stocks to your portfolio but don't have the time or expertise to hand-pick a few, the Market Vectors Semiconductor ETF (SMH +2.62%) could save you a lot of trouble. Instead of trying to figure out which semiconductor stocks will perform best, you can use this ETF to invest in lots of them simultaneously.
The basics
ETFs often sport lower expense ratios than their mutual-fund cousins. This ETF, focused on semiconductor stocks, sports a relatively low expense ratio -- an annual fee -- of 0.35%. The fund is on the small side, so if you're thinking of buying, beware of possibly large spreads between its bid and ask prices. Consider using a limit order if you want to buy in.
This ETF has outperformed the world market over the past year, but it's too young to offer much of a meaningful track record. As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.
Why semiconductor stocks?
Our growing world population will demand more and better high-tech products and services over time, boosting the business of successful technology-oriented companies. And these days, much of the technology we use is built on semiconductors, so the long-term prospects for many semiconductor stocks are solid.
More than a handful of semiconductor stocks had strong performances over the past year. LED lighting specialist Cree (CREE +0.00%) took a hit following a quarterly earnings report that featured big double-digit revenue and earnings growth but also lowered near-term projections from management. Bulls like that the LED market is expected to grow by about 34% annually over the next few years, eventually totaling nearly $100 billion. They also like Cree's sizable investments in marketing and growth. Meanwhile, Cree's bulbs have received an Energy Star rating that will permit them to qualify for rebates from utility companies. A possible ban on some traditional light bulbs could also boost the market for LED lighting.
Advanced Micro Devices (AMD +6.69%), or AMD, has been in penny-stock territory all year, perpetually battling giant Intel (INTC 1.51%) in an increasingly weak PC market. Bears don't like its heavy free-cash-flow losses in recent years, but bulls are hopeful about its recent cost-cutting and its shift away from the PC market into more promising, growing areas, such as gaming technology, where it's taking on NVIDIA in gaming chips. A turnaround may be underway, but investors should tread carefully.
Intel may be the 800-pound gorilla in the PC circuitry, but the PC market is in decline these days, with many doubting Intel. The dominant chipmaker has been moving into the mobile arena, cloud computing, and elsewhere. Some are excited about its inclusion in Apple products, but others want to see a big presence in Google Nexus tablets and smartphones, too. Some are even looking for a rebound in the PC market. Analysts at RBC Capital Markets have lost confidence in Intel's near-term prospects, but its long-term picture is still promising. Patient believers can enjoy Intel's hefty 3.8% dividend yield, which has been hiked by an annual average of 10% over the past five years.
Other semiconductor stocks didn't do quite so well over the last year but could see their fortunes change in years to come. Altera (NASDAQ: ALTR) gained 5% and yields 1.9%. With Xilinx, it's one of the two main players in the field-programmable-gate array arena, but Intel is now threatening both companies. Altera's third quarter was disappointing, with profits down 24%, management warning of a weak fourth quarter, and the stock sinking some 14%. Goldman Sachs recently downgraded Altera from "conviction buy" to "buy," which isn't good, but it's not exactly a sell rating, either.
The big picture
If you're interested in adding some semiconductor stocks to your portfolio, consider doing so via an ETF. A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.
